Yale Curriculum: The Competitor

When the electronics chain Circuit City sought to diversify its business in the early 1990s, it created CarMax; Austin Ligon ’80, then a Circuit City executive, set out to build it. The company’s business plan included two major departures from other used car sellers. First, it would emphasize volume, creating the nation’s first used car superstore. Second, CarMax was determined to use the bad reputations of used car salesmen to its advantage by emphasizing transparency and a no-haggle approach. CarMax also marked a departure for Ligon, who knew nothing of the industry before taking the job. He admitted that his family wasn’t exactly thrilled by the new position. “I didn’t go to business school to become a used car salesman,” he said.

The CarMax case proved a perfect exercise for the Competitor course. Taught by Fiona Scott Morton, professor of economics, The Competitor is part of the core curriculum for first-year students, one of eight Organizational Perspectives structured to provide students with a multidisciplinary approach to solving management problems. The Competitor is one of the four external perspectives, focused chiefly — but not exclusively — on the entities outside a company that managers must understand in order to succeed. The environment within which organizations compete is multi-layered, encompassing not only the market but political, cultural, and legal dimensions. The Competitor course draws on material from economics, accounting, marketing, organizational behavior, and politics.

The first class dealt with oligopolies, specifically the U.S. wireless industry, where four companies control 80 percent of the market. In January 2008, the FCC plans to auction a chunk of the electromagnetic spectrum, which will give companies the opportunity to greatly improve the speed and features of their service. Students prepared for the discussion by exploring an online case on the auction that included an analysis of oligopolies, a paper on the European spectrum auction, industry data, competitor research, and the wide array of journalism surrounding the subject. Scott Morton tested students on how an industry with few firms responds to changes in fixed costs and how companies in an oligopoly can increase market share, as opposed to monopolies or firms in perfectly competitive markets.

The CarMax case came in the fourth session, after classes on analyzing an entire industry, and on the rivalry between Wal-Mart and Target. Future sessions will focus on the role of reputation and identity in building a brand, cooperation vs. competition among rivals, the Microsoft anti-trust case, and the impact of social responsibility on a corporation’s competitive environment. The CarMax case revolved around how a company could enter a market with a business plan radically different from the rest of the industry. CarMax’s hassle-free approach attracted customers, but wasn’t enough on its own to drive CarMax’s success. Scott Morton took the class through a number of other competitive advantages, including the economies of scale coming from a large number of outlets, moving high-volumes of cars. This permitted CarMax to collect huge amounts of data, allowing the company to understand each geographical market and tailor inventory accordingly.

“All this data provides an enormous competitive advantage over the traditional dealer who sells a few hundred cars per year,” she said.

Ligon, who attended the class, said it was the company’s data systems that pushed it ahead even of a well-funded competitor like AutoNation, which launched in 1995 to great fanfare only to switch to the new car market four years later. “They understood marketing,” he said. “But they didn’t understand 10 percent of what it takes to succeed.”

CarMax didn’t flourish initially. Ligon said the company spent its first five years “getting ready to grow,” working in ways not visible to the outside world that later proved invaluable. He said this was possible because Circuit City treated CarMax not like a spin-off but an investment opportunity. “It was like we were a small business with venture capital funding,” he said. “We could go to them to get advice, but generally we were left alone. After the seventh year in a row we lost money, I won’t pretend there wasn’t any tension.” Fortunately for Ligon, the company soon started turning profits. In 2002, Circuit City spun off CarMax as a separate public company

Ligon retired from CarMax in June 2006. He said as the company moves forward, the key to its success will hinge on convincing more people to walk into a CarMax dealer before looking anywhere else. It might sound obvious, but it’s crucial in the car business, where Ligon said 40 percent of people buy a car from the first place they visit. CarMax’s business model built on transparency helps, but only so much. Ligon said people expect to be lied to by the person selling them a car. They don’t like it, but they accept it, which keeps them from running to CarMax in waves. “People have suffered through 80 years of misery to get a car,” he said. “It’s like having a baby. You suffer through the process but then you forget it, because you have a baby.”